The general principle in IAS 12 is that entities should measure deferred tax using the tax bases and tax rates that are consistent with the manner in which the entity expects to recover or settle the carrying amount of the item. For assets, the carrying amount of an asset is normally recovered through use, or sale, or use and sale. The distinction between recovery through use and sale is important since, in some jurisdictions, different rates might apply for income (recovery through use) and capital gains (recovery through sale). However, for investment property carried at fair value, there is a rebuttable presumption that recovery will be entirely through sale, even where the entity earns rentals from the property prior to its sale. [IAS 12 para 51C].

In order to rebut this presumption, investment property must be depreciable and held as part of a business model whose objective is to consume substantially all of the economic benefits embodied in the property through use over time. An investment property might not qualify for tax depreciation, and no part of the property’s cost is deductible against taxable rental income. Instead, the cost of the property (uplifted by an allowance for inflation, where applicable) is allowed as a deduction against sales proceeds for the purpose of computing any taxable gain arising on sale. [IAS 12 para 51C].

Deferred tax for investment properties carried at fair value should generally be measured using the tax base and rate that are consistent with recovery entirely through sale, and using capital gains tax rules (or other rules regarding the tax consequences of sale, such as rules designed to claw back any tax depreciation previously claimed in respect of the asset). If the presumption is rebutted, deferred tax should be measured reflecting the tax consequences of the expected manner of recovery.

The presumption also applies where investment property is acquired in a business combination and the acquirer later uses fair value to measure the investment property. [IAS 12 para 51D].

The freehold land component of an investment property can be recovered only through sale.